Questions over pre-2009 compensation framework

20 May, 2024 - 16:05 0 Views
Questions over pre-2009 compensation framework

The Sunday Mail

Tawanda Musarurwa

QUESTIONS have been raised over some key assumptions of the pre-2009 compensation framework, which could further delay commencement of the disbursements.

The compensation regulations – Statutory Instrument 162 of 2023 (Compensation for Loss of Pre-2009 Value of Pension Benefits Regulations) – were promulgated on September 29, 2023.

The regulations were effective from October 1, 2023.

According to the regulations, pension funds and life assurers must compensate pensioners and policyholders at a compounded interest rate of 3 percent.

“The contribution arrears…shall be converted using the appropriate annual average market portfolio implied rate and adjusted for time value of money at not less than the rate of 3 per centum compound interest per annum up to the date of payment of contribution arrears,” reads part of Statutory Instrument 162 of 2023.

Addressing the 49th Zimbabwe Association of Pension Funds (ZAPF) Congress, Actuarial Society of Zimbabwe (ASZ) president Mr Prosper Matiashe said due to boom-bust trends in the local economy over the last decade, real returns were in the negative.

“What is the return between January 1, 2013 and December 31, 2023? Actually the result we found is that on average our effective yield over these years for the assets into funds – so I took the contributions, outflows of benefits, excluding expenses – as an industry we retained -4,6 percent,” he said.

“The industry’s assets are not retaining money as is widely thought.

Mr Matiashe said if the industry assumes that real return over that period was zero percent, then the expected compensation would reduce by 50 percent.

“And this would be a way of the industry saying, ‘we are sorry’,” he said.

Minerva Risk Advisors business development manager Mr Noel Zvareva said the burden of compensation appears to be skewed on the side of pension funds and life assurers.

“If you look at the 2015 Commission of Inquiry Report by the Justice Smith Commission, it had attributions of loss of value to macro, meso and micro factors.

“But the challenge that I have seen with a lot of reports that have come out from the actuaries, and which have been presented to our trustees is that they appear to place the entire burden of compensation to the pension funds.

“(Boards of trustees) will get the report, they will go through it and then when it comes to adoption, they vote not to adopt, because the burden is real.

“It is very significant. You are looking at numbers from around US$500 000, and as high as US$15 to US$20 million in some instances, and that presents a challenge,” he said.

Government has, however, since indicated that it has set aside US$175 million as its portion of the compensation.

Insurance and Pensions Commission (IPEC) Commissioner Dr Grace Muradzikwa said the 3 percent calculation is fair, and had been agreed upon with players in the industry.

“The 3 percent was the weighted average return over the period that we assessed.

“We are aware that there were some funds which had lower returns, but if we allow that then some of them could end up with zero compensation,” she said.

“We thought that for consistency let’s apply the 3 percent, and this was after consultation with the industry.”

In terms of SI-162 of 2023, players in the industry were supposed to submit compensation plans within 90 days after the effective date of the regulations, and IPEC would approve the submissions in the period of 30 days, if they meet expectations.

But there the regulator has indicated that the industry’s submissions are not meeting the requirements.

Said IPEC director pensions Mr Cuthbert Munjoma:

“We received the submissions. They do not meet our expectations and the regulations. We have written back to the entities on certain aspects, and received submissions again, which still do not meet the requirements.

“So, we have adopted an approach where we have to sit down and clarify the expectations.

“Once we receive submissions that meet expectations, we should be able to see compensation happening.”

Mr Munjoma said players in the industry must meet the obligations of the contract they agreed with pensioners and policyholders.

“The members are not unreasonable that they would expect full restitution; what they are expecting is an account of what happened to their funds, and that is what we are calling for as IPEC,” he said.

“The industry is accounting for what it received, less what was recorded by the vagaries of the economy, and what remained. That’s what we want for transparency.”

According to IPEC, the submitted actuarial reports are lacking adequate disclosures, while some methodologies inconsistent with regulations or inadequate disclosures on methods applied.

There is also a lack of disclosure of significant assumptions where data was not available, for some the total liabilities in schedules are different from those in the actuarial report, and there is no disclosure of cohorts as required in regulations.

The regulator also said in some instances, there are high value compensation benefits for one individual without any explanation at all, and there some have unreasonable periods to extinguish liabilities for some of funds, and in some instances there is no evidence that board of trustees for insured schemes were involved in the process.

The industry says it has experienced some challenges with regards to historical data, and high and inconsistent charges from service providers.

“We have also had issues with data. One will have to appreciate that this industry was largely manual from 2000 to about 2009, and archaic systems,” said Mr Zvareva.

“We have a case in point of a pension fund that managed to identify floppy disks, which had data; but when they approached IBM they were charged US$400 000 to read that information and be able to use it in the compensation exercise.

He added that some actuarial bills were as high as US$100 000 for doing the compensation, due to the unique nature of the exercise.

“There, so there has also been lack of clarity on how to charge for this type of work.

“For them rolling back 22 years is like doing 22 actuarial valuations, so without lack of a framework we have seen some figures across the industry that are night and day apart,” he said.

With the initially set timelines for the compensation process to commence having elapsed, the exercise might take longer than expected.

And even when it does commence, there are concerns that compensation periods may be impractical.

“In terms of practicality, the exercise has given us some interesting scenarios. We are looking for compensation periods from as low as 20 years, and as high as 60 years for some pension funds,” added Mr Zvareva.

“So, on average you are looking at around 30 to 40 years to be able to expunge compensation.

“What this suggests is that some of the members might not live to enjoy the compensation, because 40 years is a lifetime.”

 

 

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